HAITONG INTERNATIONAL SECURITIES CO LTD v. JIN YONG INVESTMENTS LTD AND OTHERS

HCA 2025/2016

[2019] HKCFI 1241

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2025 OF 2016

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DECISION ON COSTS

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1.  Following my Decision dated 20 February 2019 setting aside the default judgment obtained by the plaintiff, the 3^rd defendant (“D3”) applied to vary the costs order nisi in his favour, seeking indemnity costs.

2.  For the relevant background, reference should be made to the Decision.

3.  Having read the written submissions of the parties, I consider this to be an appropriate case for the exercise of the court’s discretion to order indemnity costs.

4.  The reason for setting aside the default judgment appears from §§28 and 37 of the Decision: the court was of the view that, at the very least, the plaintiff failed to highlight to the master material information when default judgment was obtained.

5.  The common law principle underpinning the Decision is explained at §21 of the Decision.  Whether or not the procedural rules of court for service have been complied with (service pursuant to Order 11, rule 5A) is a separate matter and does not affect the application of the common law principle.

6.  As appears from §15 of the Decision, the plaintiff had identified three addresses in the Mainland for service and sought the assistance of the PRC courts pursuant to Order 11, rule 5A.

7.  In the present case, the relevant chronology (revealed by the documents exhibited as HHW-2 and HHW-3) in outline is as follows:

(a)  the plaintiff obtained leave to serve D3 out of the jurisdiction on 24 August 2016;

(b)  on 19 September 2016, it made a request to the High Court for service of judicial documents in the PRC;

(c)  attempts by PRC authorities to effect service at the three addresses took place on 14 November, 16 November and 7 December 2016 respectively;

(d)  on 14 December 2016, the High Court received two replies concerning attempts at service at the first two addresses in the PRC which included the matters summarised in §28 of the Decision and forwarded the same to the plaintiff under two covering letters dated 19 December 2016;

(e)  on 19 December 2016, the High Court received a further reply concerning service at the third of the three addresses (the substance of which was summarised in §16 of the Decision) and forwarded the same to the plaintiff under its covering letter dated 22 December 2016;

(f)  the service effected on 7 December took place almost two months after D3 was rendered incommunicado under a residential surveillance order: see §8 below.

8.  The documents constituting HHW-2 run to 26 pages. They show that, in fact, on 14 October 2016, a summons for interrogation of D3 was issued as well as a notice of “residential surveillance at designated residence” addressed to D3’s family by the PRC authorities.  Both documents are dated 14 October 2016, long before the PRC courts tried to effect service of the summons for a default judgment on 7 December 2016.  What “residential surveillance” entails in practice appears in the “explanation” referred to in §28 of the Decision.

9.  The matters mentioned in the preceding paragraph only emerged after undertaking a painstaking chronological analysis of events discerned from the exhibit.

10.  D3 prayed in aid of his application for indemnity costs the fact that the plaintiff, while deeming it appropriate to translate a large number of exhibits omitted to translate exhibit HHW-2, suggesting that the omission was “tactical”.  Translations of the relevant part of HHW-2 in the bundles available at the hearing had to be provided by D3’s solicitors.  That said, as will become apparent, it is unnecessary to consider whether such an inference should be drawn.

11.  For his part, the plaintiff cited Choy Yee Chun v Bond Star DevelopmentLtd [1997] HKLRD 1327 at 1334 for the proposition (stated in the headnote) that indemnity costs could properly be awarded “where the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously, or for any ulterior motive, or in an oppressive manner”.  It was submitted that none of those categories was applicable to what had occurred in the present case. However, Bond Star also recognised that those are not the only situations where a Court can award indemnity costs.  Such an award could be justified by “some special or unusual feature”: at 1334I – 1335G.

12.  Assuming, in the plaintiff’s favour, that the omission to translate HHW-2 and the failure to invite the master’s attention were not deliberate or intentional, no explanation has been forthcoming as to why the evidence then available of the fact that D3 had been under “residential surveillance” since mid-October 2016 and the practical implications of that fact (being material that was “buried” in the 26- page exhibit) were not matters that should have been drawn to the master’s attention.

13.  In so far as the plaintiff relies on the official certificate under Order 11, rule 5 (5), the statement made in Hong Kong Housing Authority v Hsin Yieh Architects & Associates Ltd (No 2) [2006] 4 HKLRD 107 (HCCT 39/2001, 4 April 2006) §77 to the effect that the Court cannot go behind such an official certificate, all the relevant certificate dated 12 December 2016 stated was that the judicial document has been “successfully served with the assistance of the Intermediate People’s Court of Shenzhen City”.

14.  The letter to the Foreign Affairs Office of the Higher People’s Court of Guangdong Province (the authority effecting service) stated that the judicial document had been served on an employee of D3’s company who agreed to sign the receipt on his behalf.  Therefore, at best, the service effected was “in accordance with the law of the country or place in which service was effected” within Order 11, rule 5(5).  But, on any view, it did not engage that part of sub rule (5) concerning service “on a person personally”.  Accordingly, the certificate cannot assist the plaintiff.

15.  Final judgment was obtained within less than two months of receipt of the letter dated 22 December 2016 from the High Court enclosing the report received from the PRC authorities on 19 December 2016.  The hearing bundles contained a copy of Final Judgment issued by the Court on 13 February 2017 which did not indicate who had issued the order.  There was nothing else that shed any light on the application itself or the circumstances in which it was made culminating in the Final Judgment: no paper application as such (whether by way of summons or letter) could be found in the relation to that application.

16.  On further investigation, the Court found an affirmation of Ho Hon Wah dated 24 January 2017, a clerk employed by the plaintiff’s solicitors. The affirmation was apparently filed in compliance with the Registrar’s request of 18 January 2017 “to file an affidavit to explain the process for serving the Concurrent Writ on D3 in PRC with evidence in support exhibited there to”: see §2 of the affirmation. It merely exhibited the request made to the High Court on this 19 September 2016 for assistance on service and the Return Forms received in reply in December 2016 (being exhibits HHW-2 and HHW-3), but invited attention to the Return Form enclosed with the High Court’s letter of 22 December 2016 to the effect that “service was successful” at the third address.

17.  It would appear that contrary to the prescribed procedure for obtaining a default judgment, some solicitors have taken to taking shortcuts and submitting to the Court a draft final judgment for approval without any supporting affidavit.  In the present case, that appeared to have occurred given that the Registrar’s “request” was in the form of a manuscript note endorsed on the inside page of the folder of the court file.

18.  Shortcuts to prescribed procedural rules should not be tolerated, much less entertained.  Where default judgments are concerned, they could easily result in serious injustice to the defendant said to have been in default.

19.  In my view, it is incumbent on any plaintiff seeking default judgment to approach the matter with the degree of care and attention that is commensurate with the seriousness or magnitude of the default judgment sought. A proper application should be made and the court’s attention drawn any feature or fact that is unusual.

20.  That the plaintiff “fell short” of what should have been done in that regard is plain and incontrovertible.  The so-called “application” appears to have been nothing more than an attempt to get a draft order rubberstamped as speedily as possible, the applicant not caring what the service reports by the PRC authorities actually stated or whether D3 could have had actual knowledge of the summons given the usual circumstances disclosed by the PRC service reports so long as it could state that “service was successful”.

21.  The final judgment sought was in excess of $72 million (exclusive of a 13% interest rate).  In my view, had the application for a default judgment been made conscientiously and with the requisite modicum of diligence, the fact and significance of D3 being under “residential surveillance” in the PRC since mid-October 2016, and what that entailed given the “explanation” (see §28 of the Decision) could not have been overlooked and would have been brought to the Court’s attention.  In my view, that is sufficient to constitute the “special or unusual feature” amply justifying an order for indemnity costs.

22.  D3 also seeks an order that the plaintiff bears its own costs of signing irregular judgment as prayed for in paragraph 2 of D3’s summons to set aside.  Given the circumstances set out above, D3 has made out a case for such an order.

23.  Accordingly, the costs order nisi is varied in the two respects stated above.

Written submissions from King & Wood Mallesons, for the plaintiff

Written submissions by Mr Maurice J Chan, instructed by Fan Wong & Tso, for the 3^rd defendant

HCA 2025/2016

[2019] HKCFI 460

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2025 OF 2016

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D E C I S I O N

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1.  This is an application by summons dated 23 July 2018 by Chen Hong (“D3”) to set aside the default judgment against him entered byHaitong International Securities Co Limited (“the plaintiff”) on 13 February 2017. My decision appears below.

Background facts

2.  D3 was the guarantor under two guarantees given in relation to the margin accounts maintained by Jin Yong Investments Limited (“D1”) since 3 January 2011 and Elite Achieve Limited (“D2”) since 9 July 2012 with the plaintiff. D1 and D2 were companies wholly owned by D3 who was the sole shareholder and director of each of the companies.  The guarantees were given when the accounts were respectively opened.

3.  The bulk of the securities provided as collaterals in the accounts consisted of shares in Anxin-China Holdings Limited (“Anxin”), a listed company.  D3 was its controlling shareholder, holding approximately 19% of the shares.  Trading in Anxin shares has been suspended since April 2015.

4.  The accounts of D1 and D2 started to incur margin deficits in 2014 causing the plaintiff to make margin calls.  Since February 2015,demand letters requesting that margin deficits be made good were sent to D1 and D2.

5.  On 8 March 2016, D3 executed (on behalf of himself, D1 and D2) a confirmation and application for repayment extension letter (“the confirmation letter”) in which all three defendants confirmed (a) the outstanding amount in the two margin accounts; and (b) that interest on outstanding amounts would accrue at the rate of 13% per annum and or be compoundedmonthly at a rate to be notified.  At the same time, they applied for extension of time for repayment.

6.  When D1 and D2 continued defaulting, the plaintiff exercised its rights and disposed of the collaterals on 28 June 2016 having, shortly before, given notice of its intention to do so.

7.  The collaterals comprising 603,396,000 Anxin shares were sold to a company owned by King Pak Fu (“King”) at HK$0.099 per share. The share price on its last trading day was $0.385 per share.

8.  The outstanding balances of the accounts stood at approximately HK$27.7 million for D1 and HK$44.6 million for D2.

9.  The plaintiff commenced proceedings on 4 August 2016 againstall three defendants to recover the outstanding sums due with interest at 13% per annum until payment. 

10.  On 24 August 2016, the plaintiff obtained leave to serve D3 out of the jurisdiction.  Default judgment against D1 and D2 was obtained on 14 November 2016 which went unchallenged.

11.  D3 was served in the PRC on 7 December 2016 through the PRC courts.

12.  Default judgment against D3 was entered on 13 February 2017.  That is the subject matter of the present application.

The issues arising

13.  D3 seeks to set aside the default judgment on the grounds that the judgment obtained was irregular and, in any event, D3 has a meritorious defence.

Whether judgment irregular

14.  Mr Maurice Chan, counsel for D3, submitted that at the time of service of the concurrent writ in December 2016, D3 had been under house arrest or detention by the Central Disciplinary Committee (“CDC”) for more than two months and his detention lasted until September 2017 when he was conditionally released.  It is D3’s case that he did not know of the default judgment until November 2017.  It was submitted that the default judgment obtained was thus an irregular judgment.  The summons to set aside was taken out in July 2018.

15.  The plaintiff sought the assistance of the PRC courts to effect service of the concurrent writ on D3 pursuant to Order 11, rule 5A. Through various corporate documents and filings as well as a full asset tracing report dated 12 January 2016, the plaintiff identified three addresses in the Mainland being the last known addresses of D3 known to the plaintiff.

16.  The evidence filed shows that the return form issued on 12 December 2016 by the People’s Court of Guangdong Province stated that with the assistance of the Intermediate People’s Court of Shenzhen, the court documents had been successfully served on D3 at the Hong Shu Bay property, the third of the three addresses.  A proof of service on the debtor was attached which showed that the documents were collected by Ms Xu Yun, an employee of D3’s company living at the third address, on behalf of D3. 

17.  It is common ground that service on D3 was effected in accordance with Order 11, rules 5(3) and (5) and 5A of the Rules of the High Court. 

18.  Mr Keith Lam, counsel for the plaintiff, submitted that having regard to the certificate provided by the PRC judicial authorities and the decision in Hong Kong Housing Authority v Hsin Yieh Architects & AssociatesLtd & Ors (No2) [2006] 4 HKLRD 107 (HCCT 39/2001, 4 April 2006) at §§75 – 76, the court cannot go behind it and that the default judgment obtained was a regular judgment.

19.  Mr Chan citing Fok Chun Hung v Lo Yuk Shi [1995] 2 HKC 648 submitted that the only relevant question was whether D3 was duly served,and not whether service procedure was complied with.

20.  In the Fok Chun Hung case, the writ was served on the defendant by registered post.  A default judgment was obtained before, not after, the writ was returned through the post, undelivered, to the plaintiff.  On the defendant’s application, the judgment was set aside but conditionally on various undertakings and costs.  On the defendant’s appeal, the Court of Appeal allowed the appeal on the basis that what matters is that a judgment obtained on the footing that the writ had been duly served must be set aside when in fact this was not the case.

21.  In so holding, Godfrey JA applied the principle set out in Denning LJ’s judgment in R v Appeals Committee of County of London Quarter Sessions, ex p Rossi [1956] 1 QB 682 at 691:

“ … it is a fundamental principle of our law that no one is to be … made liable by an order of any tribunal unless he has been given fair notice of the proceedings so as to enable him to appear and defend them. The common law has always been very careful to see that the defendant is fully apprised of the proceedings before it makes any order against him.”

22.  He went on to observe that:

“ … a judgment obtained in [the circumstances of the case before the Court of Appeal], even if regularly obtained, must be set aside unconditionally, just as it would be if it had been irregularly obtained. To take any other course would be a perversion of justice; whether the judgment was obtained before, or after, the return undelivered, of the copy of the writ, such a course would involve treating the defendant as one who is craving an indulgence rather than one who is (rightly) protesting at having been given no chance to be heard.” (Emphasis added)

23.  The plaintiff sought to distinguish Fok Chun Hung because that case involved service on a person within the jurisdiction under the deeming provision in Order 10, rule 1(2)(a) rather than service abroad under Order 11.  But Order 10, rule 1(1) requires personal service of the originating process.  It is of general application in that no distinction is made in rule 1(1) between a case where the defendant is within the jurisdiction and one where he is out of the jurisdiction.

24.  To that general rule, there are a number of exceptions under therules.  A useful list of exceptions can be found in Hong Kong Civil Procedure2019 at §10/1/5.  Items 1 and 2 of the exceptions concern service by registered post and by insertion through the letterbox at the defendant’s usual or last known address where the defendant is within the jurisdiction:Order 10, rule 1(2)(a).  Item 9 concerns service where defendant is in a foreign country: Order 11, rule 5(3).

25.  I am not persuaded that the fundamental common law principles have no application to the construction and operation of Order 11. In my view, Order 11 cannot be read and applied in isolation but is part of the overall framework relating to service under the rules. 

26.  In the present case, the evidence concerning attempts at servicein the PRC shows that the recipient of the documents successfully served by the PRC judicial authorities at the Hong Shu Bay address was not D3 but Ms Xu, an employee of one of D3’s companies.  There is no evidence as to what became of the documents after Ms Xu received them and critically no evidence that they were brought to D3’s notice.  

27.  D3’s evidence is that while he is one of the two registered owners of the Hong Shu Bay property, the other being Ms Xu, it was exclusively her residence and he had never authorized her to accept court documents served on him at her residence. Further, D3 stated that during the period of his detention from October 2016 up to the date of his conditional release at the very least in September 2017, he was not allowed to have any outside contact.

28.  Among the documents received from the PRC judicial authorities relating to unsuccessful attempts at service at two of the three PRC addresses,in attempting to effect service at Hong Rui Garden (being one of the three addresses for service), in response to a notice posted at that address by the authorities, Shenzhen City An Xuan Investment Limited (“the PRC company”) (the occupant at that address) filed an “explanation”[1] with the relevant PRC court dated 16 November 2016 to the effect that on 15 October 2016 it received notice that D3 (who was its legal representative) was under “residential surveillance”.  Upon enquiry, the PRC company was informed by the relevant authorities that “during [D3’s] cooperation with investigation … no application may be made for meeting him”.For that reason, the PRC company could not accept service and answer the case.  The explanation went on to state that the PRC company would promptly liaise with court should there be “new progress” regarding D3’s residential surveillance. 

29.  While it may be thought that the present case is not as cut and dried as in Fok Chun Hungas to whether or not D3 had notice of the concurrent writ, in the circumstances described above, the only reasonable inference from the matters set out in §§26-28 above is that D3 did not have fair noticeof the concurrent writ despite its being served in the PRC in accordance with Order 11, rule 5(3) on 7 December 2016. 

30.  In Fok Chun Hung, Godfrey JA took the view in that case that whether the judgment obtained was regular or irregular matters not. Likewise, the present case.  What is critical was whether the default judgment was brought to his notice[2]. Applying the principles adumbrated in that case, the default judgment must be set aside unconditionally.

Whether conditions should be imposed

31.  Mr Lam submitted that in the event of the default judgment being set aside it would be appropriate for the court to do so on terms that the judgment sum of approximately HK$72.4 million be paid into court because of the delay of 7 – 8 months from November 2017 when D3 learned of the default judgment to 23 July 2018 when the present summons was taken out.  

32.  Mr Lam referred to the judgment of the Court of Appeal in Liu ChongHing Bank Ltd v Union World (HK) Ltd & Ors [2005] 1 HKC 20 upholding the order made by the judge who, in the exercise of his discretion,had set aside a default judgment on condition of full payment of the monies owing be made into court.  That case involved a delay of 5 months. The judge below found the conduct of the defendant “irresponsible”: he had not condescended to showing any defence on the merits to the plaintiff’s claim and had given no good reason for the delay.

33.  According to D3, for the first month or so after his conditional release in September 2017, he was traumatized and could not function normally.  By November 2017 he learned for the first time about the proceedings the plaintiff had instituted against him in the Qinghai Middle Court based on the default judgment obtained against him in Hong Kong. He decided to negotiate a settlement and instructed his legal representative to do so but the response was lukewarm.

34.  Then when he regained his freedom on 11 December 2017, he had to negotiate with his bankers in the PRC because his accounts and assets had been frozen, to clear his debts and restore his financial facilities.  It was only after he moved to Hong Kong in March 2018 that he discovered that a charging order had been registered against his Hong Kong property.  He sought legal advice which led to the taking out of the present summons.

35.  Factually, the present case is very different from that pertaining in the Liu Chong Hing case[3].  Given the very different circumstances, I do not consider that D3 could be said to be at fault for not seeking legal advice in Hong Kong before coming here in March 2018 accepting, for present purposes, his evidence of what he had to endure during the 11-month period of detention until his conditional release and his instructions to those representing him to negotiate a settlement. In my view, D3 could not be criticised as having behaved irresponsibly between learning of the default judgment in November 2017 and seeking legal advice in Hong Kong in March 2018.

36.  Further, unlike the defendant in the Liu Chong Hing case, D3 has raised a number of defences, which were particularised.  While the plaintiff has sought to answer each of the defences put forward, it would not be appropriate at this juncture for the court to express any provisional view as to their merits.

37.  In fact, at the time the plaintiff applied for default judgment in February 2017, it already knew or ought to have known of the existence and contents of the “explanation” considered in §28 above. That was a significant piece of information relevant to D3’s notice of the writ. At the very least, it was material information that should have been highlighted and specifically brought to the attention of the registrar at the time the plaintiff applied for default judgment. That was not the case.

38.  In all the circumstances, I do not consider that it would be appropriate to exercise my discretion to impose a condition requiring payment into court of the amount of the plaintiff’s claim.

Estoppel

39.  This was an independent and separate answer the plaintiff invoked to the setting aside application and stems were from what was said to be inconsistent positions adopted by D3 in proceedings.  The plaintiff commenced against D3 in October 2016 in the Shenzhen Qinghai Corporation Zone People’s Court (“the Qinghai court”) and on 17 February 2017, the default judgment against D3 was filed as evidence.

40.  D3 took jurisdictional points, contending that the Qinghai court did not have jurisdiction to entertain the claim.  For present purposes,the relevant submissions are those considered under points 3 (regarding “the recognition and enforcement of the judgment rendered by the Hong Kong SAR Courts”) and 4 (regarding “applicability of the non bisinidem principle””) of the ruling of the Qinghai court.  D3 took the procedural/jurisdictional point that since the case had been decided by the Hong Kong court, the plaintiff needed first to apply to a court in the Mainland for recognition and enforcement of the judgment and without such a prepositive procedure, that the Qinghai court should dismiss the plaintiff’s litigation.

41.  On 6 March 2017, the Qinghai court ruled that the plea was a matter of whether the plaintiff has the litigation right but is not an argument for objecting to the court’s jurisdiction.  It went on to state that its “ruling only resolves whether [the Qinghai court] has jurisdiction over the present case. With respect to this, [the Qinghai court] will make determinations during the trial.”  As a result, points 3 and 4 were maintained for decision at the substantive trial.

42.  D3 appealed to the Shenzhen Intermediate People’s Court of Guangdong Province which appeals[4] were dismissed and the original ruling upheld (it would appear[5]) on 12 May 2017.

43.  D3’s defence filed on 3 September 2017 pleaded the same procedural/jurisdictional point as had been before the Qinghai court.

44.  The trial took place in June 2018.  At the time of the present hearing, the parties were not aware of the outcome of the trial.  Solicitors’ correspondence after the hearing shows that the PRC court apparently found in favour of the plaintiff on 24 November 2018 and that D3 lodged an appeal on 2 December 2018.

45.  Mr Lam submitted that it is not permissible for a party to adopt inconsistent positions in different pending proceedings which amount to an abuse of process, citing Re Shun Tak Holdings Ltd[2009] 5 HKLRD 743, §§83 – 90. Kwan J (as she then was) held (at §83) that it is an abuse of process to advance two cases which are plainly inconsistent and incompatible with one another.

46.  In Shun Tak, according to the judge’s analysis, on the petitioners’ own case, they had previously brought proceedings in Macau challenging the validity of Interdragon’s acquisition of shares in STDM.  That was their primary factual position.  In the same paragraph of the petition they were asking the Hong Kong court to “assume” Interdragon’s shareholding was valid unless otherwise determined by the Macanese court.  The judge considered that that amounted to asking the court to determine the petition on a factual basis it has not found and contrary to the position of the petitioners as presented in legal proceedings elsewhere.

47.  The issue is whether that principle is applicable to the present case which is factually different.  First, the Qinghai proceedings were not brought by D3 but by the plaintiff.  It is not as if D3 had brought a case in the PRC the factual premise of which was the validity of the default judgment. Second, D3 in challenging the Qinghai proceedings was taking procedural/ jurisdictional points.  In other words, he was not positively propounding a different set of facts inconsistent with his present setting aside application.

48.  For those reasons, I am not persuaded that the Shun Tak principle is applicable to the present case.  It follows that I do not consider estoppel to be applicable.

Conclusion

49.  For the reasons set out above, the default judgment must be set aside unconditionally and I so order.  There is also to be an order nisi of costs in favour of D3 with certificate for counsel.